Regulation 1 - Types of Regulation Flashcards
Issues with free markets
-Monopolies: arise where forces of competition are not sufficiently vigorous
-Unequal distributions of income may result in poverty for some
PROFIT MAXIMISATION is not efficient where:
1. Externalities are not paid for (pollution, congestion)
2. Asymmetry of info between buyer and seller (medicine, used cars etc)
Efficiency and regulation
- Each of the problems with free markets may justify regulation of the market in the direction of greater efficiency
- How are we to regulate?
1. Regulation (eg Trade Practices Act)
2. Civil Law (sue for damages)
3. Taxation (on cigarettes)
4. Ethical codes
Ethical Codes
- Most professions have ethical codes to deal with the asymmetry of information problem
- those who obey the code have an interest in ensuring that other obey the code too or are penalised
- must be widely accepted
- work well in small, tight-knit professional groups, but don’t replace other three forms of regulation
- External or Government Regulation
+ two problems
- Occurs when business is required to comply with externally enforceable standards of behaviour (e.g. the corporations act, the competition and consumer act)
- Issue 1: time-lag - have to wait for something bad to happen
- Issue 2: litigation not suitable for continuing problems (e.g can’t keep going to court to sue for pollution)
Limitations of laws: lack of consensus about values
As a society we lack consensus about the values we wish to advance: use of nuclear power, depletion of natural resources
Limitations of laws: players know more than the regulators
Corporations most closely associated with the problems have the most information about those problems
-The corporation should play an active role in making the law that then binds them
Limitations of laws: causes and effects
- Lack of consensus about causes and effects resulting in laws so vague that they are unenforceable
- In reaction to this, rules that are enforceable but have lost touch with the values they were originally designed for
Limitations of implementations of law
- Costs of enforcing laws make outweigh benefits
- Other attendant costs: “i won’t do more than the law requires”
- weakness of regulatory bodies
Problems with self regulation: interests and free riding
- Divergence exists between a corporation’s interests as a competitor in the marketplace and its interests as part of the wider community
- Since public goods are available whether the corp has contributed or not to the good, each corporation has an incentive to free ride
Problems with self regulation: Prisoner’s Dilemma and the Assurance Problems
- PD: strategy of not contributing to the cost of a public good dominates the strategy of paying for it, so no matter what other firms do, the particular firm will be better off not contributing
- AP: corporation withholds its contribution to the public good because it cannot obtain the assurance that other corporations will contribute their fair share
Problem with INDUSTRY self-regulation
- Industry bodies constituted in such a way that they have the powers to prevent trade abuses, will at the same time have the kinds of powers that could be utilised to restrain free trade
- Industry self-regulation has the power to be anti-competitive
Reasons for non-compliance and the deterrence trap
- Many models of regulation assume that all those who do not comply are rational but non-virtuous
- DT: penalties may be too small for advantage gained from non-compliance. However can’t raise penalty too much because it would bankrupt the offending organisation
Braithwaite’s pyramid
- Escalating deterrent response; economises on motivation; strategies at the top are necessary for success of strategies further down; effective use of limited resources by regulator because resources at the bottom are inexpensive:
- Persuasion, Warning Letter, Criminal Penalty, Licence Suspension, Licence Revocation
